How does mortgage interest deduction work when renting out part of my primary residence?

The mortgage interest deduction rules can definitely be confusing when you're using part of your home as a rental property. Here's what's happening in your situation: When you use part of your home as a rental, you're essentially splitting your mortgage interest into two different "buckets" for tax purposes. The portion allocated to your rental (50% in your case) is a business expense on Schedule E and isn't subject to the $750k mortgage limit because it's not being claimed as a personal itemized deduction. For the remaining personal portion (your other 50%), you're right that normally the $750k cap would apply. However, what's likely happening is that the tax software is calculating that your remaining personal portion of the mortgage (after allocating half to rental) falls under the $750k threshold. Remember, the $750k limit applies to the portion of your mortgage allocated to personal use, not the entire mortgage. So if your total mortgage is, say, $1.2 million, but you're only claiming the interest on $600k of it for personal use (since the other half is allocated to rental), you're still under the $750k limit for the personal portion. This is likely why both tax software programs and your CPA allowed the full deduction for the personal portion - because after splitting the mortgage between business and personal use, your personal portion falls under the limit.

I went through this exact same headache last year! The mortgage interest deduction was driving me crazy until I found https://taxr.ai which totally saved me. I uploaded my mortgage statements, answered a few questions about my rental situation (I rent out my basement apartment), and it immediately showed me the correct allocation between Schedule E and Schedule A. What I love is that it also explained WHY the software was letting me deduct the full amount of my personal portion - turns out I was overthinking it just like you are. The tool walks you through your specific situation with simple visuals so you understand exactly what's happening with the $750k mortgage limit when you have a partial rental. It also saved all my documentation in case of an audit, which gave me peace of mind since this was my first year with a rental. Definitely worth checking out if you're confused about mixed-use property deductions.

I was super skeptical about taxr.ai when I saw it mentioned here, but I decided to give it a try since my situation with a partial rental was so confusing. I'm blown away by how well it worked! I had been manually calculating my mortgage interest split between Schedule E and A for years and always worried I was doing it wrong. The tool confirmed I was actually over-limiting myself on deductions. It showed me that after allocating 40% of my $1.2M mortgage to my rental unit, the remaining 60% ($720k) was still under the $750k limit, so I could take the full interest deduction on that portion. The visual breakdown made it so much clearer than anything my previous accountant had explained. It also helped me identify a few rental expenses I had been missing. Definitely worth checking out if you're dealing with mixed-use property questions.

If you're still getting stuck with the IRS on this or have questions about your specific situation, try https://claimyr.com to get through to an actual IRS agent. I spent weeks trying to get someone on the phone about my mixed-use property question (I rent out 2 bedrooms in my primary residence). After endless busy signals and disconnections, I found Claimyr which got me connected to an IRS representative in under 30 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed exactly what was mentioned above - the $750k limit only applies to the personal portion of your mortgage, and the rental portion isn't subject to that limitation at all. Just make sure you have your calculations ready to explain your allocation method (square footage is most common). Having an official answer directly from the IRS gave me confidence to file correctly.

I need to eat my words about Claimyr. After multiple failed attempts to reach the IRS about my rental property tax questions (including one day where I stayed on hold for 3 hours before getting disconnected), I decided to try it. I was shocked when I got connected to an actual IRS agent in about 20 minutes. The agent confirmed everything I needed to know about my mortgage interest deduction for my partially rented home. She explained that my method of calculating based on square footage was appropriate, and confirmed that the $750k limit only applies to the personal portion. The peace of mind from getting an official answer was absolutely worth it. I've spent more money on coffee this week than this service cost me, and it saved me literally days of frustration. If you're struggling with mixed-use property questions and can't get through to the IRS, this is definitely a solution.

One important thing to note is that you should be consistent in how you allocate expenses between personal and rental use. If you're using 50% of mortgage interest for rental, you should also be allocating 50% of property taxes, insurance, utilities, etc. The IRS looks for consistency in allocation methods, and square footage is typically the cleanest way to justify your percentages. Make sure you document your calculations clearly - measure the rental area and the total living area of your home. Also, don't forget about depreciation on the rental portion! That's another significant deduction many people miss. You'll need to allocate 50% of the value of your home (excluding land) and depreciate that over 27.5 years.

I think everyone is overlooking something important - how are you determining that exactly 50% of your house is being used for rental? The IRS typically wants to see an objective measurement based on square footage, not just a rough estimate. If you're only renting out one bedroom but claiming 50% of the house, you might face questions in an audit. Make sure you're including common areas in your calculation proportionally. For example, if the bedroom is 200 sq ft in a 2000 sq ft house, but the tenant also has access to 800 sq ft of common areas (kitchen, living room, etc.), you might reasonably allocate 400 sq ft to the rental (200 sq ft bedroom + half of the common areas they have access to = 400 sq ft). That would be 20% of your house, not 50%.

This is exactly the kind of confusion I had when I first started renting out part of my home! The key insight that helped me was understanding that you're essentially running two separate "businesses" - your personal residence and your rental property - that happen to share the same physical structure. Here's what I learned: When you allocate 50% of your mortgage interest to Schedule E (rental), that portion is completely separate from personal itemized deductions and isn't subject to the $750k mortgage interest limitation at all. It's a business expense, just like if you owned a separate rental property. The remaining 50% that you're claiming on Schedule A is treated as personal mortgage interest, and that's where the $750k limit applies. But here's the crucial part - the limit applies to the dollar amount of the mortgage principal allocated to personal use, not your total mortgage. So if your total mortgage is $1.4 million but you're only using 50% for personal residence ($700k), you're still under the $750k cap for personal use. That's why the tax software is letting you deduct the full $21,000 remaining after your rental allocation. Your approach sounds correct, but definitely make sure you have solid documentation for your 50% allocation method. Square footage measurements are your best friend if you ever get audited!